Global tax and advisory firm PwC has urged the Indian government to issue clear guidelines on the availability of Goods and Services Tax (GST) input tax credit (ITC) for the construction of hyperscale data centres, citing growing uncertainty that could impact investments in India’s rapidly expanding digital infrastructure ecosystem.
In a set of recommendations, PwC has highlighted the need for clarity on whether the infrastructure used in data centre development should be classified as “plant and machinery” or treated as civil structures under GST law. The classification is crucial, as ITC on construction-related activities is generally restricted for civil structures but is permitted for plant and machinery used in making taxable outward supplies.
Purpose-Built Infrastructure with Unique Characteristics
PwC noted that data centres are fundamentally different from conventional real estate projects. They are purpose-built facilities designed to meet stringent operational, security, cooling, power redundancy and performance requirements. According to the firm, data centres operate with highly integrated infrastructure and cannot be easily repurposed for any other commercial use.
“Data centres have unique operational requirements, operate with integrated infrastructure, and are purpose-built so they cannot be repurposed for any other use,” PwC said, arguing that this distinction should be recognised under GST law.
Construction Not ‘On Own Account’
In the case of co-location data centre service providers, PwC has advanced an additional legal argument that construction of such facilities should not be treated as construction “on own account”. Instead, the output supply in such cases is the taxable leasing or renting of space, racks and related infrastructure to customers.
When read together with the existing plant-and-machinery carve-out under GST law, PwC believes this supports the position that ITC should be available on construction-related inputs and services used for data centres providing outward taxable supplies.
Need for Supportive Depreciation Regime
Beyond GST, PwC has also recommended that the government consider introducing a more favourable depreciation regime for data centre assets. The firm pointed out that such facilities are built to optimise the performance and security of India’s digital infrastructure and require significant upfront capital investment.
A supportive tax depreciation framework, PwC said, would help boost data centre growth and align India’s tax policy with its ambition to become a global digital and cloud services hub.
Cross-Border Taxation and Characterisation Issues
Given the cross-border nature of cloud and data centre services, PwC has also called for clarity on the tax characterisation of data centre transactions. Specifically, the firm has asked the government to clarify whether payments should be treated as royalty, fees for technical services, or ordinary business income of the parent company.
PwC warned that ambiguity in characterisation could expose non-resident entities to uncertainty around profits taxable in India, particularly where questions arise regarding the existence of a permanent establishment (PE) and profit attribution.
“In a few instances, concerns have been raised that foreign entities may have a PE in India, and therefore there should be profit attribution. This may expose the non-resident entity to uncertainty around profits taxable in India,” PwC observed.
Revisit Significant Economic Presence Thresholds
PwC has further recommended that the government review the significant economic presence (SEP) framework as it applies to data centre and cloud service companies. The firm suggested that the existing thresholds—₹2 crore in revenue or 300,000 users—may be too low for the data centre sector and could result in unintended tax exposure for non-resident enterprises.
Strategic Importance for India’s Digital Economy
India is witnessing rapid growth in demand for data centres driven by digitalisation, cloud adoption, artificial intelligence, fintech, and data localisation requirements. Industry experts believe that policy certainty on GST ITC, depreciation and cross-border taxation will be critical to attracting large-scale investments and ensuring India remains competitive as a global data centre destination.
PwC’s recommendations come at a time when both industry and policymakers are seeking to balance revenue considerations with the need to support digital infrastructure that underpins India’s broader economic and technological ambitions.
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